One of the most popular ways to invest money is in bricks and mortar. ‘Buy-to-let’ offers a way in which to do just that and recoup rent from your new property acquisition. But it’s important to know what you’re getting into to make the most from your investment and ensure that it is ‘safe as houses’…
What is buy-to-let?
Buy-to-let is a type of mortgage that has been on offer in the UK since 1996. It’s a product that allows a landlord to purchase a property with the specific intention of letting it out.
Unlike a mortgage for a property you intend to occupy, lenders calculate the amount they wish to loan based on what they perceive the rent will be on the property. They typically want to see that rent repayments will be about 125% of the mortgage payments.
A first-time investor will need to earn at least £25,000 a year and have a good credit record. You will probably struggle to get a buy-to-let mortgage unless you own your own property, either outright or with an existing mortgage.
Buy-to-let products also often come with an upper age limit, ie the age you will be when the mortgage ends. This is typically 70 to 75, meaning it’s probably best to invest before you turn 50.
Interest rates on buy-to-let mortgages are normally higher to reflect on what lenders perceive to be a slightly higher risk. The minimum deposit on a property is often 25% - leaving a 75% mortgage – and the policies often come with higher fees.
Most buy-to-let mortgages are ‘interest-only’, meaning your payments only deal with the interest the mortgage accrues and that you will need to repay the capital in full when the product comes to its end. This can come from an investment part-funded by the profit you make as landlord.
Try to ensure that your sole plan to pay off the mortgage isn’t simply selling the property on as this is risky and depends on the market at the time. Also, don’t forget to factor in that you might be left without a tenant for periods of your time as a landlord and you must set aside cash for repairs and maintenance.
You can obtain a buy-to-let mortgage from a bank or building society, just as you would a normal mortgage. But, given that this is an investment for the future, you might well benefit from the know-how of a broker. House Simple has teamed up with independent fee-free broker London & Country to offer help and advice tailored to your personal needs.
As a landlord your rental income is taxed in the same way as your salary (with different bands depending on your total income), albeit with no National Insurance. However, as an investor, you will be able to deduct some expenses and mortgage interest before you start paying tax. Expenses include the cost of repairs, estate agent charges, cleaning, gardening, bills and insurance.
Return on investment
A buy-to-let investor needs to get a few things right in order to get the most from their investment. It’s important to find the right property in the right location – and that might mean researching the market and investing slightly further from your home than you might have thought. Take a look at the rent levels in an area and compare the potential ‘yield’ of the properties you look at when shopping.
For example, a £200,000 property earning £10,000 has a 5% yield, whereas a £150,000 property attracting £8,500 rent has a 5.7% yield and so, pound-for-pound performs better.